Slowing growth but massive profits mean Apple is a mature business with new
challenges, says Matt Warman

For decades the lists of the largest companies in the world were dominated by oil and gas giants – BP, ExxonMobil, Shell and Total had the commodity that everyone needed. But the advent of the digital age increasingly means technology is the new resource. Touchscreens and software from Apple, Samsung and Microsoft are frequently deemed as essential by businesses and consumers as power itself, and their results show it.

In Tuesday’s latest quarterly numbers, Apple revealed that it had made as much money as ever at $37.43bn (£21.9), with vast cash reserves – $165bn – largely held outside its US base. Improving margins and sales mean it sold more iPhones and made more money than it ever has for a comparable period in its history.

In fact, Apple’s position is increasingly analogous to those giant oil companies.The huge profits made hardly a difference to its share price because that is now what investors expect. They come from Apple exploring new territories, finding new markets where it can sell its existing products, and from the company continuing to mine its vast, existing fields of users in Europe, America and increasingly China.

But like oil companies, Apple faces two twin challenges: how can it best mine new, increasingly expensive to access countries, and how can it come up with something new to justify its continued position. And just like oil companies, the huge reservoirs created by the iOS operating system are not as profitable as they were at first. Users replace tablets, such as the iPad, more like they replace laptops, rather than with the frequency of mobile phones.

Ben Wood, of CCS Insight, observes that “Apple has still delivered a strong quarter of results, despite revenue falling slightly below investor expectations and the persistence of a year-on-year decline in iPad volume.” Noting that the market for tablets is still growing, compared to the increasingly saturated smartphone market, he adds “Weak iPad sales need to be viewed in the context of Apple stating that more than half of its customers are first-time tablet buyers. We believe many iPad owners are merely deferring their next tablet purchase. Future growth opportunities also exist in market sectors such as education.”

Recent figures from Counterpoint suggest that in May this year, Samsung’s brand new phone, the Galaxy S5, was already selling 2 million units fewer than the soon-to-be-replaced iPhone’s 7million. Samsung’s previous flagship kept pace with Apple for rather longer. The suggestion is that Apple’s loyal fanbase continues to be loyal and that the close family ties between iPads, iPhones and the Mac computer line is promoting growth and loyalty overall.

“Apple remains in a fundamentally strong position despite ever-increasing competition in the smartphone market and tough conditions in the tablet segment,” says Wood. In fact, he argues, the problems facing the oil company is not exploration or competition, it is simply mining the existing products fast enough. “If our expectations of two premium iPhone variants prove correct, its big challenges in the near term will be supply and pricing to provide clear distinction between these two models,” he says. “Longer term, Apple’s biggest challenge is investor expectation, given that it’s hard to envision a new product category repeating the profit driving impact of a $600 iPhone shipping in excess of 35 million units a quarter.”

That accusation, increasingly dogging Apple, is not so much that it has lost its mojo as that there simply isn’t the scope to repeat its previous successes. Phones and tablets will be the interface through which we will see ever more of our health and our homes, but that makes them feel more like commoditised sheets of glass than ever. Even if Apple does make a watch, a TV or an as yet unimagined device of genius, it will take a long time before it repeats the successes of 2007’s great discovery, the iPhone.

So what next for Apple?

iTVThe suggestion that Apple is about to release a TV has been around for at least five years, but it looks no closer to coming true today than it did then. Apple has made prototypes, and that underlines that the company has maintained its focus by saying no to countless ideas other firms would have embraced with undignified haste. It’s worth remembering that TVs are coming down in price, making Apple’s 37pc margins hard to maintain, and those who currently make them are struggling to make a profit at all.

iPadWhen it was first launched the iPad was criticised for simply being a big iPhone with a silly name – in fact its turned out to be a product that is just as important to the company’s future as the iPhone. A new deal with IBM will see the two firms focus on businesses and the cloud services they will increasingly need. Education, too, represents an area of real opportunity for Apple but the continuing challenge is what to do with the iPad next: a thinner model with a better screen is obvious, but sales are already slowing rapidly.

iWatchEndlessly rumoured, it now seems all but certain that Apple will release some sort of watch. It even has a plant making sapphire, the perfect material for the device. But it is becoming increasingly obvious that watches, as pushed by Google and Samsung in particular, are best thought of as companion devices for phones rather than the next radical innovation. If Apple can be the brand to disprove the consensus, then it will invent a new market that it seems likely it could own like the iPhone.

iPhoneWhen Steve Jobs announced the iPhone in 2007 he said it would take the competition five years to catch up – he was right, and now Apple is relying increasingly on the loyal pool of users that it has built up over that period. In the face of growing competition from equally impressive hardware from Microsoft’s Nokia, Samsung, HTC and LG, it introduced two models for the first time, the 5s and the cheaper 5c. But the iPhone 6 must do something new, with a bigger screen to keep up with rivals and a focus on health and home automation.